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Monday, November 30, 2015

The belief that increased competition leads to greater efficiency and higher productivity is one of the articles of faith for admission to the economic priesthood.

Economic practitioners often know little about the peculiarities of particular markets – about their specific areas of market failure – and often don't think they need to know because what they do know about is their profession's two magic answers to inefficiency.

The first is to "get the incentives right" (the claimed rationale for much tax reform) and the second is to increase competitive pressure.

There's a lot of truth to both propositions, but not as much as it suits economists to believe. Because it comes from their model of markets, many economists' belief that the more competition the better – and the more choice the better – is so deeply ingrained it requires no empirical confirmation.

This makes economists chronic sufferers from what psychologists call "confirmation bias" – they make a mental note of all the examples they see that seem to confirm their pre-existing views about how the economy works, but quickly forget those examples that don't.

So when the Turnbull government confidently asserts that implementing the many recommendations of Professor Ian Harper's review of competition policy will do much to lift the economy's rate of productivity improvement, few economists are inclined to demur.

Many of the reforms Harper proposes make much sense: ending the protection of chemists, coastal shipping and the owners of taxi licences and intellectual property, rationalising the pricing regimes for roads and water, and changing to an "effects test" in trade practices law.

Initially, Harper wanted deregulation of liquor licensing laws, but pulled back when economists who did know about the market failures in the area showed him evidence of the significant "negative social externalities​" (e.g. people getting bashed outside pubs) associated with alcohol consumption. Who knew?

Unfortunately, Harper's church-going ways haven't helped him appreciate the potentially adverse effects on family life – family life? Why would an economist know or care about family life? – arising from further deregulation of retail trading hours.

We'll see how many of Harper's braver proposals are actually implemented. In any case, most of them are up to the premiers, not the feds.

But the most potentially alarming is Harper's proposal that the principles of competition policy be extended to the domain of "human services" – healthcare, education and community services – which is mainly the responsibility of the states.

There's no denying that health and education are areas of huge government spending and economic significance, replete with inefficiencies and ineffectiveness. They ought to be much higher on the reform agenda than yet more tinkering with the tax system and the wage-fixing rules.

But to frame them as part of competition policy is an old economists' trick: take an area that's always been outside the marketplace and marketise​ it. Take the world as it is and make it more like the textbook assumes it to be.

Apply the economists' two magic answers – getting the incentives right and introducing competition and choice – and everything will fix itself without the economists ever needing to come to grips with the causes of the particular inefficiencies that are causing the problem.

Brilliant. But often disastrous. Think of the string of stuff-ups that have followed the econocrats' efforts to contract-out the provision of government services.

Think of the allegations of widespread rorting by operators of the job services network that replaced the Commonwealth Employment Service.

Think of the way contracting-out of childcare services allowed the rise and collapse of ABC Learning, at great cost and inconvenience to parents and taxpayers.

Think of last week's collapse of Vocation Ltd and the much wider rorting of the misguided experiment with profit-motivated provision of higher education. Federal and state "reformers" are totally stuffing up vocational education in response to the problems with TAFE.

Think of all the money federal taxpayers have pumped into private schools in the sacred name of choice, without any evidence of this wider competition leading to higher standards of education on either side of the fence.

Think of all the effort put into the MySchool website to promote choice and competition while our scores continue to slide on the international indicators of literacy and numeracy.

Even the pink batts scheme is an example of the disaster – and death – that can follow when you naively give profit-motivated business people a pipeline into government coffers.

Sorry, econocrats. If you want to achieve genuine improvements in the delivery of health and education and community services, you'll have to try a mighty lot harder than applying magic answers.